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Thursday, March 31, 2011

What States Do Not Have State Income Tax

It is often ask in forums that I visit and in other conversations about the cheapest places to live and cheapest places to retire, ‘what states do not have state income tax’. This is a concern to many as it is viewed and is, a huge financial bonus when a state does not levy a state income tax.

There are many different combinations of sales tax, income tax (or lack of it) and property taxes in the 50 states that comprise the United States. It is understood that the income to run the state funded programs and services has to come from somewhere but it vastly different from state to state. Some are lucky enough to have rich sources of income and can diminish the burden on the individual, while others spread it’s income burden (tax burden) to all citizens in a number of ways.

There is a organization called the Tax Foundation, and every year since 1941 they have produced a document called Facts & Figures; How Does Your State Compare? (ISBN – 978-1-88409-6-22-8) that addresses how states rank in terms of taxation rates compared to one another. There is some controversy about their methodology from time to time but it is generally accepted as an accurate representation of the facts as they relate to state taxation of individuals and businesses.

In one of their comparisons they show how much residents pay as a part of their income (not individually but per capita). They include local sales taxes, property taxes and other local taxes. Here is the result of that comparison:

Lowest Tax Percentages of per capita income by State

• Alaska is 6.4 % of per capita income

• Nevada is 6.6% of per capita income

• Wyoming is 7% of per capita income

• Florida is 7.4% of per capita income

• New Hampshire is 7.6% of per capita income

Every state in the United States has created its own set of taxes that will be applied to those that live within or visiting within borders. Because every states tax mix is different it does present some challenges in compiling this data. It is sometimes difficult to compare data without unintended bias. In some of these debates about methodology over the years between the Census Bureau and the Tax Foundation, there have been fierce disagreements and the Census Bureau now publishes its own list. The Tax Foundation has specifically taken the Census Bureau to task for announcing the best state to live in without looking at the amount of tax collected and not talking into account if the person that was paying the tax was a resident or not. The Census bureau does publish a disclaimer (as of the date of this post) on their website that warns readers that the data could be misleading and uses the example of Florida where much of the state’s sales tax revenue comes from out-of-state guests on vacation or visiting there and making purchases that are taxed.

There are arguments for both sides that have credibility and that point to the difficulty in gathering data as well as interrupting it to reflect things like the actual tax burden paid per capita in a state. These arguments may be somewhat related to the saying of ‘splitting hairs’ and although they are important and significant, they may not ultimately reveal the best states to live in.

Each situation that you consider important that is effected by the amount of state tax should carefully be considered and you should subsequently devise a plan or formula for making a decision. Then hopefully their data will be pertinent to you in that decision. Until and if our data collection methods become more detailed, it will be hard to determine the best place to live for tax purposes and as inferred above, needs to be determined on a case by case basis.

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About Me

I'm on a Mission! to find the Cheapest Places to Live with a nice quality of life. I found Panama to be one such place - you can learn more in my Free 'Letters from Panama' at LearnAboutPanama.com. Please join in the discussion here on the blog by leaving your comments and your own stories about places where people are happy living frugally!